Mortgage Shopping? Save Money, Pay Points

Ask a mortgage shopper if he or she plans to pay points and you’re likely to get one of two reactions: a puzzled look or a snort of dismissal.

But in today’s market conditions, paying points is worth serious consideration. It doesn’t make sense to take out a new mortgage unless you plan to keep it for a number of years, perhaps long enough to make points pay.

But it depends on individual circumstances. Sometimes paying one point makes no sense while paying two or three does. Other times, it works the other way: paying one point brings a nice savings, but paying two or three doesn’t. It all depends on the figures you put into the calculation.

Each point is an upfront interest payment equal to 1% of the loan amount. Paying points gets you a lower interest rate on the loan, reducing your monthly payment. If you keep the mortgage long enough for those payment savings to offset the cost of the points, the points save you money. The BankingMyWay.com Mortgage Points Calculator figures how long it would take for points to pay.

Many borrowers who understand the potential benefits of points pass up the opportunity because they feel it’s easier to pay a little more each month than to come up with a big lump sum at closing. After all, three points on a $300,000 loans is $9,000, which can be a lot of money to fork over on top of all the other closing costs.

Also, most borrowers aren’t really sure they’ll keep their mortgages long enough for points to produce real savings, so it’s easy to dismiss the idea.

But in today’s market, there’s a better chance you will keep your loan long enough for points to pay. Because the housing market is so shaky, it doesn’t make sense to buy a home unless you intend to keep it for seven, eight, even 10 years. That’s generally long enough for points to produce real savings.

Also, mortgage rates are so low now that it’s not likely you will see an opportunity to refinance at a lower rate in the next few years. The average 30-year fixed-rate loan charges only 5.242%, according to the mortgage survey. That’s very low by historical standards. So, again, you’re likely to keep your loan long enough for points to pay.

Currently United Savings Bank of Philadelphia quotes three rates for 30-year fixed-rate mortgages: 5.125% with zero points, 4.971% with one point and 4.77% with three points. By paying the first point, you reduce the loan rate by 0.154 percentage points, while the second and third points reduce it by less - just 0.1005 percentage points for each point.

The calculator shows that over a 10-year period, paying one point on a $300,000 loan would save the homeowner just $115, hardly enough to bother with. But paying three points would make no sense at all, since it would not recoup all of the expense, leaving the homeowner $2,818 in the red.

However, if the homeowner kept the mortgage for 30 years, paying one point would reduce total costs by $4,308, while paying three would do slightly better, saving $5,721.

Of course, the first step in any mortgage search should be to find the lowest rates possible. Use the shopping tool to find better-than-average deals. In New York, for example, TD Bank (Stock Quote: TD) offers a 5% 30-year deal, while JP Morgan Chase (Stock Quote: JPM) has one at 5.125%.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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